'Medium cap stocks outperform blue-chips'

Published: 18 February 2015

Medium cap stocks outperformed their blue-chip counterparts on the Zimbabwe Stock Exchange (ZSE) last year with the trend expected to continue through the current year if macro-economic fundamentals do not change, according to stock analysts Emergent Research.

According to the analysts, 'Investment Outlook Report 2015', mid-cap firms on the local bourse have been able to flexibly respond to declining consumption in the country.

"By the end of 2014 there were only eight stocks classified as large caps. Collectively, the large cap index returned -10 percent. The medium caps index which numbered eleven was the best performer at 3 percent. Performance of small caps performed poorly posting a -5 percent return.

"During times of declining consumption, medium caps are better flexible to deal with evolving markets and consumer preferences which often require changes in product mix and strategy. The same cannot be said of large caps," said Emergent Research.

They added that "in the absence of a major policy shift that inspires confidence, large cap companies are likely to underperform second year in a row".

Zimbabwe's Gross Domestic Product (GDP) growth has in the past been stimulated by private consumption, but with the country experiencing a contraction in consumer spending over the past 2 to 3 year, the fall in consumption has largely affected the value of consumer stocks such as BAT, Delta and OK, which are some of the ZSE's heavyweights.

Econometer Global Capital's Takunda Mugaga has however said the local bourse's blue-chips "will offer defensive qualities that can limit the downward risk of equity portfolios."

Latent investing opportunities on the ZSE Ray Chipendo, who is research lead at the South African-headquartered Emergent Research, told BH24 that there are however numerous concealed investing opportunities on the local stock exchange, particularly in relation to listed firms in sectors that pay no heed to economic developments, and undervalued quality stocks.

"In general, there are still interesting opportunities for discerning investors. We see these opportunities in three forms: Sector disconnection to economy - as the economy slows down not all sectors will move in the same direction. Some companies and sectors will do well when consumption and spending patterns recalibrate as a matter of adapting to new income levels.

"Under-valued quality stocks - Though we have cautioned readers against buying solely on the premise of valuation, we expect the current market to present interesting picks in quality assets that are undervalued.

Such stocks will resurge as the general market mood lifts up," said Chipendo.

"As we pointed out, if buyout firms can bargain hunt and find interesting deals, we believe it is a good strategy for the investor to look out for possible takeover targets."

But they cautioned against betting on price developments on the global commodity market.

According to the World Bank's Commodity Markets Outlook (January 2015), metal prices are forecast to drop by more than 5 percent this year, while more moderate declines are foreseen for precious metals at 3 percent, on top of the 12 percent decline seen last year.

"We expect the mining index to post strong returns in 2015 again. We see current expansion and restoration of mining projects becoming a new impetus for another good run for the mining index.

There is a lack of consensus on the direction that metal commodities will take in 2015.

A preferable approach will be to invest based on operational performance and not anticipated lifting in prices," said the analysts.
- BH24 I Tawanda Musarurwa